“Canadians continue to pile on debt and now collectively owe more than $1.5 trillion, according to the latest figures from Equifax Canada.
The consumer credit rating agency says the level at the end of the third quarter was up 7.4 per cent from $1.409 trillion a year ago.
Nearly two-thirds of the total owed, or $985.1 billion, is mortgage debt. Excluding mortgages, the average debt held by Canadians stands at $20,891.”
– from The Canadian Press, 3 Dec 2014

—All the best for the festive season, and wishing you all a very happy 2015.
Regular readers know this blog is dormant (even though the ideas expressed within are very much alive). We leave up the archives because they are, well, archives, and we leave the comments open for discussion (which is only moderated infrequently). Keep well everybody. -vreaa

“Qiqi Hong walks past her sleek, blue-tiled hot tub and an infinity pool that seems to disappear like a waterfall into the chilly air above West Vancouver. She leans on the patio railing and breathes in the majestic ocean view that takes in the towering Douglas firs of Stanley Park, the skyscrapers of Vancouver, the Asia-bound freighters anchored in English Bay and – way off in the misty distance – the faint, rugged outline of Gabriola Island.

“We’re in heaven,” says Ms. Hong. “I can’t find any house that can compare to my house.”

The serene West Coast lifestyle did not come cheaply: Ms. Hong’s home cost $6-million. But it is an investment she can easily afford. The irrepressible businesswoman founded a successful lighting-design business in Beijing that thrived in China’s building boom. It now has more than 100 employees. But tired of Beijing’s hectic pace and foul air, she decided to come to Vancouver – after looking in Switzerland, Germany and the United States – on the Canadian government’s immigrant investor program in 2011. She now also owns three other houses on Vancouver’s west side, each valued in excess of $1.3-million, as well as a downtown condo she uses on weekends and lends to visiting friends.…

“Some now say Vancouver is a bedroom community for the world.”…
“In my opinion, I think it’s good for the economy,” Ms. Hong says, noting that the number of Chinese residents on her street has soared in recent years and that the local businessman she bought her house from made a cool $1.5-million more than he originally paid. “In Vancouver,” Ms. Hong says, “the house prices are perfect.”

…

Dan Scarrow, who recently opened an office in Shanghai for Vancouver-based Macdonald Realty Ltd., one of the largest real estate firms in British Columbia, makes no apologies for courting prospective home buyers in China. He says 178 of the firm’s 531 sales of single-family detached homes within Vancouver’s city limits last year – or 33.5 per cent – went to buyers with ties to China. …

“Vancouver has become a global resort city. The prices have decoupled from local wages,” says Mr. Scarrow, whose mother, Lynn Hsu, moved from Taiwan to Vancouver in 1979 and is now president and majority owner of Macdonald Realty.

As he pursues investors in Shanghai, he intends to steer buyers toward commercial properties if they have no interest in settling down in Vancouver. Some foreign buyers have purchased Vancouver real estate purely as an investment, without occupying the properties or renting them out, but that has triggered some resentment because it’s sometimes seen as detracting from the vitality of a neighbourhood.

But in general, Mr. Scarrow believes the positives of offshore money far outweigh negatives. Baby boomers can cash out at a profit and downsize with enough money left to help out their children. Selling houses also increases sales of appliances, furniture and home renovations. Vancouver’s housing market has become an important ecosystem unto itself, which explains why developers are anxious to keep foreign money flowing.

Unwise to get into bidding wars with multi-millionaires who think they are buying ‘heaven’.
Perhaps the ‘Monaco’ scenario (kinda akin to “bedroom community for the world” scenario) will come to pass, and Vancouver RE will forever be disconnected from local fundamentals. Or perhaps not.
-ed.

Hilliard MacBeth found his Canadian clients were “obsessed” with RE; he has written a book about the Canadian RE bubble & is calling for a 40%-50% price drop.
He also references “a very wise and astute money manager”, Jeremy Grantham.
Watch video here.“Every single bubble bursts”.
– G&M, 24 Sep 2014

“The governor of the Bank of Canada is sending a strong message to the markets: You do your job and we will do ours.
Stephen Poloz has been dogged by the perception that he has been attempting to “talk down the dollar” — essentially to help encourage business investment and expand export markets — as the economy struggles to regain its initial post-recession traction.
On Tuesday, Mr. Poloz attempted to set the markets straight, saying it is not up to his policymakers to determine currency levels. To do so, he said, would be to court economic “havoc.”
– Financial Post, 16 Sep 2014

“Creating havoc with perversely subterranean interest rates, on the other hand, is completely within our mandate…”
– vreaa
—

“..new condos in [Toronto] and [Vancouver] routinely cost $700 a foot, while whole houses in the US average less than $100 for the same foot.”
– Just one of many reasons listed by Garth Turner in answer to the rhetorical question ‘How to tell when housing boom’s running on fumes?’, Greaterfool.ca, 14 Sept 2014
—

“British Columbia’s housing market is still red hot this year but declining affordability could slow it down by 2015, according to the Canadian Real Estate Association. …
The average price for a home is expected to rise by about six per cent in B.C. in 2014, but … the CREA is forecasting B.C.’s average real estate prices to rise by less than one per cent in 2015.”
– Vancouver Sun, 15 Sep 2014

“Johan and Alejandra are the kind of Swedes the IMF has been warning about – piling up debt to keep up with an ever-rising property market and fund a lifestyle of travel, maids and nights out.
The couple plan to buy a flat in Stockholm for 5 to 6 million Swedish crowns ($724,000 to $869,000), initially with an interest-only bank loan, among other spending plans.
“I may travel, I may want to invest in a new business,” said Alejandra, who runs a cafe in the city centre.
Less than a month away from a general election, there are no votes in campaigning to stop the credit flowing, but there are fears that such Swedes could be the Achilles heel of a country that boasts a coveted AAA score from credit rating agencies Fitch and S&P.
Four in 10 mortgage borrowers in Sweden are not paying off their debt, and those that are repaying the principal do so at a rate that would on average take nearly a century.
Swedish property prices have nearly tripled in just two decades. In July, home prices rose at a double-digit pace from a year ago – the first time in more than four years.”
– from ‘Swedish household debt soars as poll nears’, CNBC, 24 Aug 2014

“In the capital the latest full-year figures show that the average wage is £39,920, while the average house price is about £400,000.
Prices are therefore 10 times greater than wages.
But in South Buckinghamshire, in towns like Amersham and Beaconsfield, the average home is worth 20 times as much as the annual local salary.
Outside the South East, the place where houses are least affordable is the Cotswolds, where they cost 19 times wages.
The countryside may be scenic, but that is little compensation when the average worker, putting a third of his or her salary into a mortgage, would need over 60 years to pay it off.” …
“”I shall be disappointed if I only get £550,000 for it,” says Mike Golding, as he shows me into a two-bedroom, first-floor flat he is selling. It has no garden, few proper windows, and no view to speak of.
But such prices are not excessive in Stow on the Wold, a pretty market town in the Cotswolds, where the undersupply of affordable housing is matched only by the oversupply of Barbour jackets, local organic brie and bow-windowed tea shops.
One such tea shop is run by Anna Wright and her mother.
She and her boyfriend have been looking for a house to buy, but, faced with prices like the above, they have given up looking in Stow.
“We have been priced out of the market,” she says.
“You are privileged to grow up in the Cotswolds, but there’s never an expectation of buying a house here,” she tells me.
A few doors down, 21-year-old shop worker Nicola O’Driscoll is in the same position.
She has been forced to look for a flat in Cheltenham, no less than 18 miles away.
“It’s really unfair. I feel like they don’t want youngsters to live around here. Because there’s no way they can,” she says.
– from ‘The 62 areas where houses are less affordable than London’, BBC, 18 Aug 2014

Too-cheap money has caused many speculative bubbles in housing, and perverted the relationship between income and housing prices. – vreaa

“The Fed’s mode of operation has drastically changed over the past 12 years. Prior to 2002 the Fed would tighten monetary policy in reaction to outward signs of rising “price inflation” and loosen monetary policy in reaction to outward signs of falling “price inflation”, but beginning in 2002 the Fed became far more biased towards loose monetary policy. This bias is now so great that we are starting to wonder whether the Fed has become permanently loose.”

“The chart above comparing the Fed Funds Rate (FFR) target set by the Fed with the Future Inflation Gauge (FIG) clearly illustrates how the Fed has changed over the past two decades. Note that the Future Inflation Gauge is calculated monthly by the Economic Cycle Research Institute (ECRI) and should really be called the Future CPI Gauge, because it is designed to lead the CPI by about 11 months.”

“The chart shows that prior to 2002 the FFR tended to follow the FIG. After the FIG warned of rising “price pressures” the Fed would start hiking the FFR, and after the FIG started signaling reduced upward pressure on the CPI the Fed would start cutting the FFR. During 2002-2004, however, the Fed not only didn’t hike its targeted interest rate in response to a sharp increase in the FIG, it continued to cut the FFR. The Fed’s decision to maintain an ultra-loose stance during 2002-2004 was the fuel for the real estate investment bubble and set the stage for the collapse of 2007-2009 [in the US].” [editor’s note: The Canadian RE market was bailed out by parallel rate cuts here — before it had even crashed!]

“There was a lesson to be learned from what happened during 2002-2007, but the Fed apparently learned the wrong lesson. The lesson that should have been learned was: Don’t provide monetary fuel for bubble activities, because the eventual economic fallout will be devastating. Unfortunately, the lesson that was actually learned by the Fed was: An economic bust can be avoided forever by keeping monetary policy loose forever. The result is that the divergence between the FFR and the FIG that arose during the first half of the last decade is nothing compared to the divergence that is now in progress. Moreover, the near-zero FFR doesn’t do justice to the ‘looseness’ of the Fed’s current stance, in that 4+ years after the end of the last official recession the Fed is still pumping money as if the US were in the midst of a financial crisis.” …

“By ignoring investment bubbles and erring far more in favour of “inflation” than it has ever done in the past, the Fed is currently setting the stage for the mother-of-all economic busts.”

Canadian markets are completely subservient to action in the US. (If you don’t believe this, watch any aspect of a Canadian market of any sort on a US market holiday. Flatline!)
Canadian interest rates were cut in lockstep with the US in late 2008, even though the RE market here sorely didn’t need the juicing. The BOC and the Min of Finance were, and are, at fault for dropping interest rates too far, and then holding them too low for too long.
If you want to see a graphic representation of the reason for our national RE bubble, look at the orange areas in chart below (a version of the one above). [BTW, the charts here are almost a year old.. the FIG is now back around 4, and the Fed Fund rate remains zero].
The policy is perverse, and the piper is yet to be paid.
– vreaa

Josh sells real estate in urban Toronto. “Fourteen years now,” he says, “since I was 21. And in all that time, there’s been only one really crappy time – six years ago now.” …
Josh’s clients are mostly people his age – the sub-40 set. The average deal is around $800,000, he says, “but one in four, I’d say, range from one-two to one-four.” Of those spending more than a million, Josh figures the average mortgage is about 80% – taking into consideration CMHC insurance is no longer available for seven-figure deals.
“Used to be that a million-dollar mortgage was a big deal,” he adds. “Now I see them all the time.”
By the way, to carry $1,000,000 today with a variable-rate mortgage at just under prime is about $4,500 a month. With insurance and property tax, it’s a little over $5,000. The land transfer tax in Toronto on a $1.2 million so-so house needing serious renos in the north end is $40,200. So to close on that with 20% down would require cash of about $290,000, and then a million in financing. …
No wonder RBC came out with that report last week. The bank found people between 35 and 44 have far more debt than their parents did at the same age – and more leverage than any other group in society. Mortgage rates today may be 3% instead of the 14% they were in 1993, but the amount of debt has ballooned so dramatically that monthly payments eat up far more of disposable income.
As a result, people in this age group are more dependent on real estate than any in the past. Almost 100% of the increase in net worth for Josh’s cohort has come from housing appreciation, since they’re saving and investing virtually nothing outside of their walls.
While real estate augments, they win. When it declines, they’re screwed. …
[And] it’s worth understanding what happens to people like Josh’s clients once they have seen a disaster. In the US these days the appetite for house-buying is sinking with regularity among the young. A decade ago 40% of all purchasers in the States were first-timers. Today is it 27%. In Canada the number exceeds 50%, and is rising.
So either the American kids are wusses and might suffer, or the kids here are naïve and could implode.
– from Generations, by Garth Turner, greaterfool.ca, 10 Aug 2014

Our bubble is national, and will end as all bubbles do, with implosion.
Vancouver has the biggest bubble and the least non-RE support; it will suffer the most.
As one recent online article succinctly stated: “You can’t taper a Ponzi scheme”.
– vreaa